SMIC, China's leading chipmaker, has recently issued a warning about the looming threat of a global chip oversupply. This caution comes amid an intensifying price war in the Chinese market for less advanced chips.
During an earnings call on Friday, the company's co-CEO, Zhao Haijun, pointed out the increasing competition within the industry, stating that "orders worth tens of millions suddenly went to competitors."
SMIC Issues Warning Amid Global Chip Oversupply Concerns
As Nikkei Asia reported, SMIC expressed concerns about a surge in chip production globally, driven by the launch of numerous new manufacturing plants in the coming months.
This expansion is expected to exacerbate an already challenging market environment, where profit margins have plummeted to their lowest levels since 2009.
Citing LSEG data, CNBC reports that SMIC's first-quarter financial results underscored the severity of the situation. Despite a 19.7% year-on-year increase in revenue to $1.75 billion, the company's profit plunged by 68.9% to $71.7 million. Gross margin also hit a record low of 13.7%, indicating significant pressure on profitability.
The root cause of this dilemma lies in the aggressive efforts by chipmakers in China to ramp up production. These efforts aim to support domestic technology giants like Huawei in navigating tightening export controls imposed by the United States.
However, the unintended consequence has been market saturation, leading to intense price competition among industry players.
This photo shows a general view of the logo of SMIC (Semiconductor Manufacturing International Corporation) at the chip maker's facilities at Pudong district in Shanghai on March 15, 2024. Photo by HECTOR RETAMAL/AFP via Getty Images
Industry Braces for Impact Amid Chip Oversupply Warnings
SMIC's outlook for the near future remains cautious. While there are signs of a recovery in global demand, particularly in the Chinese smartphone market, the company anticipates that new production capacity will outstrip demand, at least in the short term.
Zhao Haijun emphasized the need for time to absorb the influx of new capacity, expressing concerns that a significant portion of it may remain underutilized.
The situation has raised alarm bells among analysts and industry executives, who worry about the potential ramifications of an oversupply of less advanced chips.
According to data from SEMI, 42 chip projects globally are slated to commence operations in 2024, with 18 located in China. This surge in capacity, primarily focused on less advanced chips, is driven by U.S. restrictions on advanced semiconductor equipment.
To address these challenges, SMIC prioritizes capacity construction and research and development activities. The company aims to bolster its competitiveness and increase market share despite the fierce competition in the industry. However, it acknowledges that maintaining profitability in such a volatile environment will be an uphill battle.
As one of China's key semiconductor industry players, SMIC's struggles indicate larger global chip supply chain tensions.
